GE Generating Institutional Interest

This is one of the week's key takeaways when the multinational conglomerate reports earnings on Friday. Already, options-trading patterns suggest
GE
's stock will advance on the news.

In the past week, institutional investors began to accumulate bullish call options, departing from the defensiveness that has characterized GE's options trading since the start of the year. These investors acquired 37 puts for every 100 calls, a significant change since the start of the year when they acquired 82 puts for every 100 calls.

To most investors, analyzing put and call trading is obtuse, but it is important because options trading helps reveal the sentiment of sophisticated investors.

So even as GE's stock has stalled, and lost almost 7% of its value since Jan. 1, GE's put-call ratio adjusted to focus only on institutional investors -- presumably the most savvy market participants -- shows they have found reason to suddenly see value in GE's long-suffering stock. The April 35 and 37.50 calls are widely held, suggesting GE's shares will make incremental gains before expiration on April 20.

The change in sentiment among institutional investors -- and Friday's numbers will help determine if this newfound optimism transcends the earnings report or is simply evidence of short-term speculative trading -- comes as a growing number of stock analysts are increasingly bullish about GE's 2007 prospects.

When GE's shares were at $35.55 -- they have since declined a bit -- GE's price-to-earnings ratio was the lowest it has been in the past 12 years, CIBC Oppenheimer's Christopher Glynn advised clients in a March 30 note. At the time, he also noted that GE's dividend yield of 3.2% was the highest in the past decade.

The analyst told his clients that GE's first-quarter results were not likely to be "for the trophy case," but the timing of investing in GE might be memorable as the pullback in the shares creates a low-risk entry point.

To be sure, anyone who has ever invested in GE is likely skeptical. To own GE is to know the frustration of investing in a company that is universally admired for its operations and the prowess of its executives, yet which remains invalidated by the stock market.

Part of the problem is that GE is so vast that it is hard to understand, and thus value, which has made watching GE's stock akin to watching an iceberg slowly melt. The stock is down 6.5% thus far in 2007, which erased the modest 2.2% gain of the past 12 months. The frustration with the stock is even higher for long-term investors: GE shares are down 4.6% during the past five years.

For the first quarter, investors are expecting the company's results will reveal that GE's earnings are more balanced than in the past. GE has told investors that first-quarter earnings per share are expected to grow 8% to 13% to 43 cents to 45 cents, respectively.

Historically, GE's financial-services business has paced earnings. For the first time in perhaps a decade GE's industrial businesses may now be poised to lead earnings as investors expect weak results for the consumer-finance business, particularly at WMC Mortgage, which is a major subprime-loan issuer, and in Japan, where the company is curtailing operations due to emerging government regulations.

The prospect of balanced earnings sounds great and regal, but it is not compelling enough to eliminate the specter of a "value trap." At about $34, GE's stock is inexpensive enough for most investors to buy shares to speculate on earnings. But the prudent approach for all but the most aggressive investors, and for the true believers in GE, is to seek a better balance of risk and reward until it is clear something is really different. If ever there was a time to use options as a precursor to establish a position in a stock, now is the time.

GE's at-the-money options that expire in a month, and in three months, are not inexpensive, but they certainly cost much less than buying stock, and this will prove to be money well spent should GE's earnings, and management's comments about future revenue, not live up to expectations.

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